Why should I care about fund charges?
Fund charges matter because, whilst fund performance can vary, you’ll have to pay the charges come rain or shine.
Over time, fund charges can make a huge difference to your returns.
Here’s how £1,000 in a fund costing 0.1% and a fund costing 1% would perform in three different investment performance scenarios, ranging from poor (5% loss), to neutral (0% growth) to good (5% growth):
Funds with higher charges aren’t necessarily better performing; charges can reflect the management style, asset classes invested in or simply the prestige of the fund manager.
This guide explains how fund charges work and how to save money, whilst covering associated fees and taxes you might encounter.
What is the ongoing charge figure (OCF)?
A more realistic indication of the true annual cost is a measure called the ongoing charge figure (OCF).
This includes the Annual Management Charge, from which firms make their profits.
The OCF also takes into account various additional costs such as trustee and auditor fees, that are taken directly out of the fund. These extra charges can easily amount to around 0.1% on top of the AMC.
Fund managers are legally obliged to show the ongoing charge in their fund literature and they must publish it once a year. It can be found in a document called the Key Investor Information Document (KIID).
- Find our more: read our reviews of investment platforms including AJ Bell, Hargreaves Lansdown and Halifax Share dealing
What other fund charges should I expect?
These costs aren’t included in the ongoing charges figure:
Trading fees and stamp duty reserve tax
Every time the fund buys or sells a share they incur charges and potentially stamp duty.
Passively-managed tracker funds tend to have lower trading fees as they switch investments less often.
Performance fees
Some unit trusts and OEICs, and many investment trusts, also levy additional performance fees on top of the regular annual charges – typically taking an extra 20% of everything above a certain level of performance.
How can I reduce fund charges?
Some types of fund are far more expensive than others.
For instance, the annual management charge (which makes up the majority of the OCF) typically ranges between:
- 0.75% to 1.25% in most actively managed funds.
- 0.1% to 0.85% in most passively managed 'tracker' funds
- 0.8% to 1.8% in most investment trusts
While it's important to control costs, your overall investment portfolio should reflect your long-term investment aims, which may call for more expensive funds or trusts.
Would you be better off buying shares?
Cutting out the fund manager entirely and holding your own shares could save you money.
However, you should consider whether you have the time or expertise to pick individual shares yourself. Funds can hold thousands of shares, the selection and oversight of which involves large teams of experts.
Also keep in mind that investment platforms can charge a fee each time you buy and sell a share, as well as a fee to hold shares, which can make frequent trading more expensive. Some platforms are better suited to frequent traders.
What are the charges for using an investment platform or broker?
If you buy a fund through an investment platform or broker, this will involve extra fees.
Investment platforms charge either a percentage annual fee, or a fixed amount each year. If you have a relatively small portfolio (up to, say, £50,000), a percentage-based charge will generally work out cheaper, while large portfolios fare better with a flat fee.
Take this example, which compares the annual charges levied by two real life investment platforms. One charges a fixed fee of £200, whilst the other charges a fee equivalent to 0.39% of the portfolio:
The difference in fees between the cheapest and most expensive platforms can add up to thousands of pounds for a large portfolio. Some platforms also charge a few pounds when you buy or sell an investment and some charge ‘exit fees’, although these are increasingly rare.
- Find the best investment platforms with our comprehensive guide
What are the fees for using a financial adviser?
Financial advisers use a variety of charging structure but they key fees are:
- The adviser's own fees - this could be a fixed fee, hourly fee or (most commonly) a percentage of your investments
- Fee charged by the platform holding your investments - this is likely to be charged as a percentage
- Fees charged by the funds and trusts you hold - again, these are most likely to be percentages
You should receive at least an annual statement containing a breakdown of these costs. This should be expressed as a percentage, and as a pounds and pence figure.
These costs may be paid by selling some of your investments, or by using cash that has built up from dividends.
- Find out more: how to find a financial adviser
Will I have to pay tax on my investments?
Even after you’ve paid all these fund charges, you could still be hit by tax.
You can earn up to £2,000 a year from dividends without paying dividend tax; beyond this you’ll have to pay 7.5%, for basic rate taxpayers (8.75% from April 2022), 32.5% for higher rate (33.75 from April 2022) or 38.1% for additional rate (39.35% from April 2022).
You may also have to pay capital gains tax when you sell funds. You can earn up to £12,300 from capital gains each year; beyond this you’ll need to pay 10% for basic rate taxpayers or 20% for higher or additional rate taxpayers (18% or 28% for residential property respectively).
Rather than relying on tax allowances, you can shield your fund earnings from both these charges by putting all your funds in a stocks and shares Isa.
- Find out more: stocks and shares Isas
